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Abstract

The degree of capitalization of subsidies into land rents has been mainly determined by different payments implementation systems and land markets. The 2013 EU Common Agricultural Policy (CAP) reform introduces changes in the implementation of decoupled payments towards convergence of payments and associated payment conditions. Using a two-step dynamic system Generalized Methods of Moment (GMM) estimation technique, this paper investigates the effect of these changes on farmland rental rates in Northern Ireland(NI) where a short term conacre land rental system is dominant. The model is able to control for expectation error and unobserved heterogeneity, and endogenous covariates all at once. Our estimates suggest that the capitalization of decoupled payments into land rental prices increases as the payment subsidies converges towards flat rate. Specifically, on average, the marginal effect on rental rates of an additional pound of the SPS is 9 pence (21 pence), increasing to 18 pence (42 pence) following the 2015 reform in the short term (long term). Given that about one third of land are rented in NI, the increase of land capitalisation rate is of particular relevance in designing more efficient future subsidy policy.

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